LEGAL RULING NO. 410

CALIFORNIA
FRANCHISE TAX BOARD
Legal Ruling No. 410

January
16, 1979

OWNERSHIP REQUIREMENT FOR
COMBINED REPORTING PURPOSES WHERE THE PARENT IS A GENERAL CORPORATION

Facts

Over
50 percent of the voting stock of each of three corporations (subsidiaries) is
owned by a common corporation (parent). The three subsidiaries are engaged in
a single unitary business conducted within and without this state. None of the
subsidiaries are, however, engaged in a unitary business with the parent company.
Therefore, the parent company is not a part of the unitary business conducted
by the three subsidiaries and thus not includible with the three subsidiaries
for combined reporting purposes.

Question

Is
the unity of ownership requirement for purposes of combining the three subsidiaries
satisfied where the subsidiaries are owned and controlled by the same parent corporation
and are engaged in a single unitary business, but none of which are unitary with
the parent corporation?

Decision

Yes

Discussion

In
the case of Chase Brass & Copper Co. v. Franchise Tax Board, 10 Cal.App.3d
496, 87 Cal.Rptr. 239, appeal dismissed and Cert. denied, 400 U.S. 961, 27 Law.Ed.2d
381, 91 Sup. Ct. 365 (1970), the court was faced with the question of whether
unity of ownership existed where it was found that two wholly owned subsidiaries
were engaged in a unitary business but one had only a few unitary ties with the
common parent company. The court held that unity of ownership was present, as
the parent was the sole owner of the stock of both subsidiaries.

In
the Appeal of Revere Copper and Brass Incorporated, Cal. St. Bd. of Equal, July
26, 1977, CCH 205-752, P-H 13,102-S, the Board of Equalization stated:

The
ownership requirement contemplates an element of controlling ownership over all
parts of the business;-

Generally speaking,
controlling ownership can only be established by common ownership, directly or
indirectly, of more than 50 percent of a corporation's voting stock. (Emphasis
added.)

***

See also the Appeal of Standard
Brands Incorporated, Cal. St. Bd. of Equal., October 18, 1977, CCH 205-789, P-H
.

The language in the above case is consistent with the
result reached by the court in Chase Brass and makes it clearly evident that all
that is needed to satisfy the ownership requirement for combination purposes is
the presence of the element of controlling ownership. There is no requirement
that the corporation holding controlling ownership itself be unitary and combinable
with the unitary group.